Integral Ad Science Q3 2023 Earnings Call Transcript

Quartr
Provided by Quartr
November 2, 2023

There are 16 speakers on the call.

Operator

After the speakers' presentation, there will be a question and answer session. Please be advised that today's call is being recorded. I will now turn the call over to your host, Mr. Jonathan Schafer, VSP of Investor Relations. Please go ahead.

Speaker 1

Thank you. Good afternoon, and welcome to the IAS 2023 Third Quarter Financial Results Conference Call. I'm joined today by Lisa Uchschneider, CEO and Tanya Secor, CFO. Before we begin, please note that today's call and prepared remarks contain forward looking statements. We refer you to the company's filings with the SEC posted on our Investor Relations site at investors.

Speaker 1

Integralads.com for more details about important risks and uncertainties that could cause actual results to differ materially from our expectations. We will also refer to non GAAP measures on today's call. A reconciliation of non GAAP measures to the most directly comparable GAAP measures is contained in today's earnings release available on our Investor Relations site. All financial comparisons, unless noted otherwise, are based on the prior year period. So with these formalities out of the way, I'd now like to turn the call over to our CEO, Lisa Ochsneider.

Speaker 1

Lisa, you may begin.

Speaker 2

Thanks, Jonathan, and welcome, everyone, to our 2023 Q3 call. We reported strong results that exceeded our prior expectations. Revenue increased 19 percent to $120,300,000 and adjusted EBITDA Reached $40,600,000 at 34% margin. We are raising our financial outlook for the Full year to reflect our positive Q3 performance and business momentum in the Q4. Tanya will provide a detailed review of our financial results Increased outlook for the full year.

Speaker 2

Let me start by highlighting some key wins and expansions that reinforce the value of our AI backed products, Platform integrations, superior service and geographic reach. BMW named IS is its global verification partner. BMW selected IS for our technology innovation with products like Total Media Quality Or TMQ, vertical expertise in the auto sector, extensive international footprint and high quality service. We are delighted that Ferrero, a global sweet packaged food company, has named IES as its exclusive global measurement and optimization We secured a major renewal and expansion of our partnership with Mars, the home of iconic brands, including M and M, Snickers, KIND and Pedigree. This multi year exclusive agreement includes IES' leading market measurement and optimization offerings with annual minimum impression commitments.

Speaker 2

The renewal also expands our relationship with Mars To new markets, including Mexico, Brazil, Germany and the APAC region. During the Q3, we generated a 41% year over year increase in social media revenue, surpassing 33% social media growth in the 2nd quarter. The accelerated growth in social media reflects the investments we're making in our technology and integrations with the major social platforms. Our TMQ product identifies higher quality media at a 3x rate, which leads to higher returns on advertising spend for marketers. As TMQ is AI backed, the data becomes more accurate and adds greater value over time.

Speaker 2

We frame the social media opportunity for IES in terms of big building blocks, which are the live feeds and the medium building blocks of short form video. Let me update you on the latest initiatives underway. Since expanding inventory coverage of our total media quality for YouTube product Impression growth and active accounts have doubled in September from July. We've seen strong customer of TMQ and YouTube from clients including Dyson, Volvo and Kimberly Clark. Advertisers using our TMQ Products on YouTube now have access to a suitability dashboard that allows them to analyze brand suitability trends and create a custom suitability profile.

Speaker 2

During the quarter, we expanded our brand safety YouTube product suite capabilities To Google Video Partners or GBP, IES is now providing viewability and invalid traffic or IVT measurement for YouTube Shorts Inventory and offers brand safety, suitability, viewability and IVT measurement across GVP. In addition, we enhanced our integration with Google Campaign Manager 360. Marketers now have the ability to wrap tags, Create and launch campaigns with ease. This enhancement ensures advertiser data is automatically populated in IAS Signal, Our UI dashboard and creates greater efficiencies and reduce campaign creation time. We continue to drive adoption of our TMQ brand safety and suitability measurement product on TikTok.

Speaker 2

TMQ is now available to advertisers in 50 markets, Up from 30 at the end of the second quarter and ahead of our expectation of 40 markets by year end, active measurement campaigns on TikTok Have more than doubled year to date and impressions have quadrupled. In August, IES announced an exclusive first to market partnership with X to provide pre bid brand safety and suitability for video across the social platform. We are currently in beta testing, expect to move quickly to launch in the coming weeks with a host of blue chip clients. IES was selected by X based on the sophistication of our TMQ product. With this expansion, IES leads the providing end to end support for marketers on X with a full array of solutions from measurement to optimization.

Speaker 2

IES plans to offer brand suitability verification on Meta for both Facebook and Instagram Feed and Reels. We remain on track to begin client testing in Q4 of this year. Turning to optimization, And we are prioritizing ease of activation and transparency, which are particularly important for mid tier performance based marketers. We are driving product adoption and streamlining customer activation with a single point of integration. Our differentiated total visibility product enables marketers to optimize campaign spend with greater insights into the quality, Supply path and cost of programmatic ads and now with an overlay of marketing outcomes.

Speaker 2

We've expanded our total visibility offering with our new performance dashboard, which allows marketers to analyze metrics such as success rate over time and cost per action alongside financial and media quality insight. We are also increasing the number of contextual segments, which allows for higher avoidance in targeting customization. Lastly, we are expanding our reach via increased DSP coverage. We are excited to announce that we have enhanced Our integration with Amazon Ads to include our context control pre bid segments. In addition to our standard pre bid segments within Amazon CSP, Customers can now easily discover and avoid unsuitable content and reach contextually relevant content.

Speaker 2

In Retail Media, IES is a leader in independent verification with coverage for viewability, fraud And brand safety with the top retail media networks. Year to date revenue from retail media networks has grown nearly 150%. We are delighted to partner with Instacart and bring a new level of transparency to Instacart Ads, the company's advertising products and solutions. IES will provide viewability and IVT measurement on Instacart ads, which reaches more than 5,500 CPG brands. At Advertising Week in New York City, I hosted a panel that included Tim Castelli, VP, Global Advertising Sales at Instacart.

Speaker 2

Tim spoke to Instacart's ability to see across the grocery sales ecosystem and to provide actionable data for marketers. We look forward to helping Instacart optimize the Instacart ads experience for our brand partners. We launched our previously announced first to market partnership with Criteo's Commerce Media Platform in September. IES' partnership with Criteo allows brands and agencies to measure viewability and IBT on a retailer site Across any on-site ad format and in Criteo's network of 210 retail partners, Marketers can be assured their media buys are driving engagement and validating real users. We also launched 8 pre bid brand safety content categories to allow marketers the ability to optimize their programmatic buying In Criteo's Commerce Max DSP, we've discussed how we are harnessing AI to accelerate the rollout of new markets and advanced capabilities for products such as context control and TMQ.

Speaker 2

In addition, our product development is fueled by AI, which is a major point of differentiation for Yes, and a game changer for our customers. AI is a critical component of the new products we're launching in emerging areas, including attention and made for advertising or MFA. Our quality attention measurement product helps advertisers assess campaign performance and unlock superior results. We launched a quality attention beta in August, which generated a high level of interest from advertisers. Over 1,500,000,000 impressions have already been measured using multi variable models that identify which Signals are most relevant to optimize the insights being delivered.

Speaker 2

In our early beta analysis, we found that Higher attention can lead to a nearly 3x lift in success rates and 98% better cost efficiency. We launched the 2nd phase of the measurement beta last week, which includes Lumen's eye tracking technology. In October, IES announced its new MFA site detection and avoidance solution to align with our customers' media strategies related to this type of content. Leveraging AI and ML, IAS technology aims to improve transparency into advertiser campaign quality, Identify where spend is allocated and inform optimizations to minimize waste. According to the ANA's Programmatic media supply chain transparency study from June, 21% of all advertisement impressions measure was served on MFA sites.

Speaker 2

The IAS MFA product is available now as a beta measurement offering with general availability expected in early 2024. In our CTV Publisher business, Publica is integrating with TV OEMs, which serve as the entry point into OEMs often build their own proprietary advertising businesses and provide their ad serving technology to a growing number of streaming services. During the quarter, VIZIO selected Publica to help operate its global CTV advertising business. We look forward to expanding our partnership with VIZIO And our previously announced exclusive renewal with Samsung in addition to exploring new OEM opportunities. Publica recently announced a direct integration with Yahoo!

Speaker 2

Backstage. Via the server server connection, Publishers using the Publica ad platform can now access ad budgets from the Yahoo! DSP directly within the Publica Unified Auction. During the Q3, we earned our 1st certification from TrustArc, which conducts annual privacy focused third party attestations. The Trustee Enterprise Privacy Seal certifies that IES' data privacy policies and practices aligned with the standards set by the leaders in governance and compliance.

Speaker 2

To conclude, I am proud of the team for delivering a strong quarter, And we are excited about our positive outlook for the Q4. We are executing against our product roadmap With highly differentiated technology and fast growing channels, including short form video, as we begin our planning For 2024, we intend to prioritize investment in innovation that leverages AI to bring the most advanced products to our customers. And with that, I'll turn the call over to Tanya to review the financials.

Speaker 3

Thanks, Lisa, and welcome, everyone. We're pleased to report another strong quarter of profitable growth. We accelerated our revenue growth in the Q3 to 19% And adjusted EBITDA margin reached 34%. We are raising our full year outlook to reflect our outperformance in the 3rd quarter and positive business momentum into the 4th quarter. Total revenue in the 3rd quarter increased to $120,300,000 well ahead of our prior outlook of $112,000,000 to $114,000,000 Both optimization and measurement revenue reported growth in excess of 20% for the quarter.

Speaker 3

Turning to our business lines. Optimization revenue grew 21% to $57,000,000 Optimization revenue benefited from increased product adoption and enhanced DSP integrations. In addition, we a larger contribution from our T and E vertical, which we expect to moderate in the Q4. CPG performed well And TekTelco improved from the Q2. Context Control revenue grew at a double digit rate as a result of accelerated mid tier growth, which more than doubled versus the Q2.

Speaker 3

We are expanding our mid tier presence by adding new product capabilities, Enhancing our go to market with the hiring of new programmatic specialists and establishing new partnerships with mid tier agencies. Measurement revenue increased 23 percent to $47,800,000 in the 3rd quarter. The increase in measurement revenue was attributable primarily to Accelerated growth in social media of 41% compared to 33% in the 2nd quarter. We continue to increase adoption of new and existing social media products with expanded market reach. During the quarter, we increased Customer uptake of TMQ in both TikTok and YouTube, including YouTube Shorts.

Speaker 3

In Meta, we saw an increase in existing products with impression growth in Reels. Social media measurement revenue represented more than half of total measurement revenue for the first time at 51% in the 3rd quarter, up from 47% in the Q2 of 2023, with the balance being open web, which continued to grow. Social media revenue represented 20% of total revenue in the 3rd quarter, up from 18% in the Q2 of 2023. Video, which commands a pricing premium to display, grew 40% in the 3rd quarter as a result of growth in social media. Video accounted for 54% of measurement revenue in the 3rd quarter, up from 50% in the Q2 of 2023.

Speaker 3

On a combined basis, total revenue from advertisers, including optimization and measurement revenue increased 22% and represented 87% of 3rd quarter revenue. Publisher revenue increased to $15,500,000 in the 3rd quarter. Publica revenue growth was partially offset by the performance of our non CTV supply side businesses. Publica represented more than half of publisher revenue in the quarter. We continue to innovate and deepen our integrations with publishers and platforms, including Samsung and VIZIO, as we continue to build our pipeline to support Publica's growth.

Speaker 3

Publisher revenue represented 13% of total third International revenue excluding the Americas accelerated to 17% year over year growth From 10% in the Q2 of 2023. EMEA revenue growth was particularly strong at 20% due to the contribution from previously announced new global and regional wins. Additionally, increased adoption of our TMQ Social media products drove measurement revenue internationally. While international revenue represented 31% of total revenue in the 3rd quarter, 42% of measurement revenue came from outside of the Americas. Gross profit margin for the 3rd quarter was 79%, which keeps us on track to deliver on our full year margin expectation of 78% to 80% and reflects investment in our data infrastructure and increased hosting costs.

Speaker 3

Sales and marketing, technology and development and general and administrative expenses combined only increased 2% year over year as a result of increased efficiency and productivity through streamlined operations. In addition, lower expense growth reflects higher capitalization of internally developed software related to long term investments in our technology and improved productivity of our engineering team. Adjusted EBITDA for the Q3, which excludes stock based compensation and one time items, increased 35% year over year to $40,600,000 Our strong adjusted EBITDA margin of 34% was due to higher than expected revenue for the period as well as increased operating efficiencies. We remain focused on continuing to invest in the long term growth of the business. Net loss for the Q3 was $13,700,000 or 0 point related to stock based compensation from the return target options expensed in the Q2.

Speaker 3

Turning to our performance metrics. Our 3rd quarter net revenue retention or NRR increased to 116% versus 115% in the 2nd quarter due to higher product adoption. The total number of large advertising customers, which includes both mid And top tier clients with annual revenue over $200,000 increased to 2 19, up 19% compared to 184 And up sequentially from 208 in the Q2 of 2023. Revenue from large advertising customers was 85% of Total advertising revenue at the end of the period, up from 84% at June 30th and up from 81% at the end of the Q3 of 2022. We maintain a healthy balance sheet with strong cash flow conversion that enables us to lower our debt and provides us with financial flexibility to invest and the long term growth of the business.

Speaker 3

Cash and cash equivalents at the end of the Q3 were $92,000,000 During the quarter, we reduced our long term debt by $20,000,000 to $175,000,000 resulting in net debt of $83,000,000 Year to date, we've reduced indebtedness by $50,000,000 Our net debt to trailing 12 month adjusted EBITDA is currently 0.5 Turning to guidance. For the Q4 ending December 31, 2023, We expect total revenue in the range of $130,000,000 to $132,000,000 a 12% year over year growth rate at the midpoint. Adjusted EBITDA for the Q4 is expected in the range of $45,000,000 to $47,000,000 or a 35% margin at the midpoint of the range. For the full year 2023, we are increasing our revenue and adjusted EBITDA ranges to reflect our strong third quarter results and 4th quarter outlook. We are raising the midpoint of our full year outlook by $9,000,000 and now expect total revenue in the range of $470,000,000 to $472,000,000 or 15% year over year growth at the midpoint of the range.

Speaker 3

We are increasing the midpoint of our adjusted EBITDA outlook for the full year 2023 by $7,000,000 to $157,000,000 to $159,000,000 or approximately 34% adjusted EBITDA margin at the midpoint of the range. A few additional modeling points. We continue to expect gross profit margin in the range of 78% to 80% for the full year. 4th quarter stock based compensation expense is expected in the range of $15,000,000 to $16,000,000 Full year stock based compensation expense, which includes the RTO expense is now expected in the range of $81,000,000 to $82,000,000 We expect weighted average shares outstanding for the 4th Quarter in the range of 157,500,000 to 158,500,000 shares and 156 to 157,000,000 shares for the full year. We delivered strong revenue growth and adjusted EBITDA profitability in the 3rd quarter.

Speaker 3

As a result of our Q3 performance and business momentum in the Q4, we are raising our full year outlook. We're in a healthy financial position and we will continue to invest in the business to drive long term growth to enhance shareholder value. Lisa and I are now ready to take your questions. Operator?

Operator

Thank you. Our first question comes from the line of Mark Kelley of Stifel. Your line is open.

Speaker 4

Great. Thank you very much. Good afternoon, everyone. I wanted to ask you Two quick ones. First, just optimization really outperformed in Q3.

Speaker 4

I guess, can you talk through more of the moving pieces? I know you called out More mid market clients driving some of the performance there. But just curious The Amazon DSP partnership, can that lead to continued reacceleration and optimization? I guess, what should we be thinking about there? And then second, separately, when we're thinking through the MetaFeed access, I know you're on track to test with clients in Q4, but Is there kind of a like a set cadence from going from testing to GA that you can maybe point us Yes, from some of the other integrations with

Speaker 5

the social platforms. Thank you.

Speaker 2

Sure. I'm happy to take both questions, Mark. So the first on optimization, we did see strong growth in optimization revenue in Q3 of 21% growth. Year over year, it was due to various factors, including increased product adoption, enhanced DSP integrations, And also, I should call out, context control grew at a faster rate due to the acceleration that we're seeing in the mid tier Channel. The other thing I'll call out with the MediFeed access, as we mentioned, we're thrilled that We are heading towards launching a beta towards the end of Q4 with Meta.

Speaker 2

Meta is our largest Social platform and you can see the strength of our measurement growth in 3rd quarter. We'll launch the beta and GA is expected sometime early in 2024. I know we've discussed before, Mark, With Meta, because it is our largest social platform and we already have a significant client base of advertisers Who are using IES Solutions in Meta, I do think that the acceleration we'll see an acceleration at both the beta and the launch of the GA.

Speaker 4

Perfect. Thank you, Lisa. Yes.

Speaker 2

Thanks, Mark.

Operator

Thank you. One moment, please. Our next question comes from the line of Andrew Merrick of Raymond James. Your line is open.

Speaker 6

Hi, thanks for taking my questions and congrats on the quarter. You talked about a lot of large new customers driving some strength in the results. Are there any commonalities in the feedback You're receiving as to why you were selected over competitors, anything that's coming up in multiple of your conversations?

Speaker 2

Sure. Happy to take that, Andrew. And then Tanya, feel free if you want to add additional color. We were delighted to announce those 3 Large brands of Primero, BMW and Mars and expanding our partnership with Mars In the Q3, a couple of call outs in terms of why these major marketers are selecting IIS And expanding with IES, due to our product innovation with products like TMQ, In particular, BMW, our vertical expertise in the auto sector and with all three of the brands Extensive international footprint and high quality service. Tanya, anything else you'd like to add?

Speaker 3

Sure. I would just also add that we have a really strong presence with what we define as large customers. You can see in the KPIs that we disclosed the growing nature of those large Customers are pleased to be reporting 219 large customers at the end of the 3rd quarter, up from 184 at the end of Q3 last year.

Speaker 6

Great. And then one more if I could. I know the made for advertisement topic has been A big attention grabbing subject in the industry. What has the feedback been on your MFA products so far? And how should we expect that scaling curve To progress, could it be maybe more front end loaded than a typical product given all of the attention around MFAs at the moment?

Speaker 6

Thank you.

Speaker 2

Yes, happy to take that one too. So media quality remains a top priority for brands. And As we're seeing in the industry, we're seeing a surge of lower quality environments, which brands do want to avoid because they just Don't see the conversions that they'd like to see. 3rd party has cited the MFA issue As advertisers are wasting as much as 20% of their ad spend on MFA And to address this problem, IAS, we recently announced our new MFA AI Sight Detection and Avoidance solution. It's available now in beta measurement offering post bid with GA will be both pre bid and post bid Expected in early 2024.

Speaker 2

And so far, the feedback has been very Positive from our advertisers. They've been clamoring for this MFA technology. And the other thing I should call out is Our MSA technology is backed by AI.

Operator

Thank you. One moment please. Our next question comes from the line of Raimo Lenschow Barclays, your line is open.

Speaker 7

Hey, I missed my name there. I think that was me. Hey, congrats from me as well on a great quarter. Just at the moment, a big discussion is that we're going into the important Q4 holiday season. What are you seeing, especially since you have a lot of international a great international perspective, what do you see in terms of How this is shaping up for you?

Speaker 7

What are the advertisements seeing given like this is such an important part of the year? And I have one follow-up, please.

Speaker 2

Okay. Great question, Raimo. So few things with that. We're pleased with our increased forecast in the 4th quarter and full year, and this reflects positive advertising outlook for the Q4. As you know, I spent a lot of time with the brands And they continue to share both in the U.

Speaker 2

S. And internationally that they're doubling down on ROI and driving efficiency, which makes our products even more relevant today more than ever. And then the other thing the marketers have been sharing about 4th quarter Yes, they're very focused on driving customer engagement and retention during this holiday season.

Speaker 7

Yes. Okay, perfect. Thank you. And then just more one point for modeling you guys next year. If you think about the Meta Feet Access and then that's going GA in early 2024.

Speaker 7

Do you are you going to limit it somehow to have like a more controlled rollout or is this going to Like open for everyone and how should we think about that kind of playing out in the numbers? Thank you and congrats from me again.

Speaker 2

All right. Thanks, Raimo. So as I like to say, we always follow Meta's lead, and they are our largest social platform This year and we expect Meta to continue to be our largest social platform in 2024. In terms of the rollout, as I mentioned, we are on track to offer brand suitability verification on Meta for both Facebook, Instagram and Reels and remain on track to start the client testing in Q4 of this year Because we already have an established base of advertisers that are running IAS solutions on Meta, I do anticipate both the beta and GA will be accelerated. Timing of the GA, like I said before, early 2024, but they're such a valued Partner for us.

Speaker 2

And then the other thing I will call out with Meta and just the social platforms in particular, It's just the uptick that we're seeing in short form video, both with Meta Reels and YouTube Shorts. I know last Q2 earnings call, we talked about the launch of viewability and invalid traffic both in Meta Reels and in YouTube Shorts And that has also been a nice tailwind for the 41% growth that we're seeing in measurement in 3rd quarter.

Speaker 4

Okay. Thank you. Thanks, Raymond.

Operator

Thank you. One moment, please. Our next question comes from the line of James Hennie of Jefferies. Your line is open.

Speaker 8

Great. Thanks for taking the question. Just looking at your Q4 revenue guidance, it imply roughly sequential growth of 8% to 10%, which if I look back historically would be one of the slower Sequential growth in the holiday quarter. Is there anything that has you concerned? Or is there just some conservatism baked in?

Speaker 8

And then I had one more follow-up for Lisa. Thank you.

Speaker 3

Sure, sure, James. Happy to address that. The 3rd quarter, we're really pleased with our above expectation performance, both on the Measurement and optimization side, 2 things that are worth noting, I talked about this a bit in the script, is that we saw stronger than Expected growth in T and E, which is our 2nd largest vertical, we expect that to moderate in the 4th quarter. And then secondly, we did see very strong growth in context control, double digit with multiple factors driving that growth. But as we have shared in the past, we do expect context control growth to moderate in the 4th quarter, but really pleased to be raising our Slide 4, the 4th quarter by $2,000,000 at the midpoint.

Speaker 8

Great. Thanks for that. And Lisa, could you just talk more about the that you're getting on the TikTok product. I think you're now live in like 50 countries. Just talk about the contribution from that product and How to think about the roadmap for 2024?

Speaker 8

Thank you.

Speaker 2

Yes, great question, James. So with TikTok, We are firing on all cylinders across social platforms and including TikTok. So We continue to drive customer adoption of our TMQ brand safety and suitability measurement product on TikTok. TMQ is now available to advertisers in 50 markets. That's up from 30 at the end of second quarter and ahead of our expectations of 40 markets by year end.

Speaker 2

And then I know we had already said it previously on the call, but Our active post bid campaigns on TikTok more than doubled year to date and impressions have quadrupled. So we're just thrilled with our partnership with TikTok. We're thrilled with the fact that brands are leaning in to our differentiated Technology backed by MLAI, and I'm incredibly proud of the team of just speed to market And again, delivering differentiated value for our brands.

Operator

Thank you. One moment please. Our next question comes from the line of Brian Gerald of Wells Fargo, your line is open.

Speaker 9

Yes, I think that was me. Great to see the acceleration in optimization. We wanted to ask Among the larger customers that you have, you've done a great job with contextual penetration there. But wondering if you could talk about Continued runway for optimization growth with those customers. Can they light up contextual in more geos for more campaigns?

Speaker 9

And then wondering if you could talk about attention as well. Does that potentially drive a wave of adoption and growth similar to what you've seen with Context control, how are you thinking about that?

Speaker 2

Sure. I'm happy to take both fits. So As I mentioned previously, we're a few things. We're pleased with the double digit growth that we're seeing in context control for this Quarter and it's reflected both with the acceleration that we're seeing with mid tier And then also it's driven by contribution that we're seeing from some of the large CPG logos That we signed several quarters ago. Mid tier is an area that I know we've talked about last quarter, but we're very, very focused on driving the acceleration of the mid tier channel.

Speaker 2

And again, we are seeing great growth quarter over Quarter, more than doubling, and we'll continue to invest and innovate in automation, In simplifying our product offerings and in particular, simplifying our optimization products for our mid tier channel. So that's where we're at with mid tier. And then great question on attention. So as we're seeing in the landscape with attention, brands are increasingly seeing attention as a key component Of their media quality strategy, we were pleased to launch our quality attention post bid beta in 3rd quarter. It has generated a high level of interest from advertisers.

Speaker 2

We're now on track to launch the 2nd phase of the measurement beta In Q4, it includes Lumin. You might remember the partnership that we announced fits with Lumin that has an industry leading Eye Tracking Technology and a few things to call out since our attention beta launch. We've already measured over 1,000,000,000 impressions using multi variable ML models, which identify Which signals are more relevant to optimize the insights being delivered? It's incredibly cool technology. And then the other thing that we're seeing that's very encouraging in our early beta analysis, we found higher attention Can lead to nearly 3x lift in conversion rates.

Speaker 2

So again, feeling really good about the rollout of the beta, Looking forward to the 2nd phase of the beta with Lumin's differentiated eye tracking technology And the advertisers are completely leaning into the solution.

Speaker 9

Awesome. Thanks, Lisa. I appreciate it.

Speaker 4

Yes. Thanks, Vince.

Operator

Thank you. One moment, please. Our next question comes from the line of Jason Helfstein of Oppenheimer. Your line is open.

Speaker 10

Thanks everybody. Two questions. Lisa, is Reels and Feed with respect to kind of Facebook and Instagram, are they going along the same timeline Or is it kind of different and product specific? And then second, thoughts around the opportunities Around performance advertising, is that something that you're thinking about in the pipeline, you organically go there, do you use M and A to get there? Thanks.

Speaker 2

Yes, sure. Happy to take both, Jason. So with Reels, with Meta Reels, as I mentioned earlier, we've launched Viewability, invalid traffic in MetaReals and YouTube shorts in Q2, both are nice driver of our accelerated measurement growth in 3rd quarter. In terms of the upcoming beta in 4th quarter With Meta in the live feed, that does include Facebook, Instagram and Meta Reels. So that will all part of the beta in 4th quarter and so same time line, with GA scheduled for early 2024.

Speaker 2

In terms of performance advertising, with performance advertising, the way we look at that, it's a couple of things. The first is, historically, the mid tier channel and we define mid tier as a channel of Advertisers spending between $200,000 $1,000,000 with IES, many of them are performance advertisers and I think that's The big reason why they're leaning into our context control solution, but also the other thing that we're focused on Is our total visibility product and enhancing that product within our overall optimization Offering and you might remember total visibility provides transparency to with supply path optimization. It helps provide additional insights across outcomes, cost, targeting tactics. So that's an area where we are Investing more resources, more time and energy. And in 2024, I think In terms of performance advertisers, they'll see and all advertisers will see an enhanced total capabilities offering.

Speaker 4

Thanks.

Operator

Thank you. One moment please. Our next question comes from the line of Mark Mahaney of Evercore. Your line is open.

Speaker 11

Hi, this is Ian on for Mark. Congrats on the good quarter. Two questions, if I may. First, it'd be great to kind of walk Go back to the macro. Are you seeing any signs of brand advertisers pausing In Q4 related to the geopolitical risks in the Middle East?

Speaker 11

And Maybe secondly, can you remind us of maybe the trends that happened for advertisers in 2020 related to the Ukraine war and maybe has there been increased need or conversations around Your guys' brand safety, brand suitability products. And second question on operating expenses for the 4th quarter. Do you guys expect to see any leverage? Or if there was, where would we expect to see that? Thanks.

Speaker 2

Okay. Thanks, Ian. So I'll take the first two questions and then Tanya can take the 3rd question. So First, firstly, regarding the crisis in the Middle East, our hearts go out to all of Those who are impacted by the war will continue to ensure our products provide value to our global customer base during this difficult time. In the Ukrainian conflict that occurred a few years ago, We did see advertisers engage in our context control offering And I don't want to correlate the 2, but we did see more and more advertisers leaning into our sophisticated context control, so that their brands ran adjacent to appropriate content.

Speaker 2

Tanya, you want to take the

Speaker 3

next question? Yes. On the third on your last question, we do expect operating leverage in the 4th quarter. The midpoint of our guidance has EBITDA adjusted EBITDA 35%. We've improved our EBITDA margin every quarter this quarter and pleased to be raising both our revenue and EBITDA guide and that 35% in the 4th quarter Would be higher than 34% in the Q4 of 2022.

Speaker 4

Thank you.

Operator

Thank you.

Speaker 2

Thanks, Denise.

Operator

One moment please. Our next question comes from the line of Youssef Squali I have Trish, your line is open.

Speaker 5

Great. Thank you very much. So a couple from me as well. So starting maybe with the optimization. Tanya, I think last quarter you said something to the extent that growth there was going to be similar to the growth in Q2, which was more like 9%, 10%.

Speaker 5

You ended up obviously doing more than double that. Can you maybe speak to the linearity Of demand for optimization throughout the quarter. And where were you guys were off? Which thing surprised you the most, I guess in a good way. And then second, on the Q4 guide, I think you just said earlier that there are 2 areas that account for maybe The slower growth expected in Q4, one was T and E and the other was the Process Control, which grew double digits, which you think should moderate in terms of growth.

Speaker 5

Maybe you can just explain Why we should expect both of these to decelerate sequentially? Thank you.

Speaker 3

Sure. So, we were really pleased to see the acceleration of growth and optimization in the 3rd quarter. And we after the 2nd quarter earnings call, we talked about optimization growth with possible But the beat was stronger than we had expected on the optimization front. There were several factors driving that. One was just overall across the T and E sector, we saw stronger spend from Particularly media brands and entertainment clients who really spent more in terms of volumes, particularly around Promotional campaigns, and we expect that to moderate in the Q4.

Speaker 3

But we also, as we talked about earlier, we're really pleased to See that some of the investments we made around mid tier clients on the context control front did have an impact on our Q3 performance. So we were pleased to see that. In terms of linearity, the digital media programmatic spend tends to be More variable than other forms of digital media, and we were just pleased to see the benefits from that in the 3rd quarter. Was your second question about overall?

Speaker 5

Yes. Just the reasons for the slowdown, sequential slowdown you're expecting across both?

Speaker 3

You mean in the Q4?

Speaker 5

Yes.

Speaker 3

Yes. So like I said, we were really pleased To be able to raise our guidance in the 4th quarter, on the measurement front, we are we expect that Social and the strong numbers that we've reported on social will continue to drive double digit growth in measurement. We're also Expecting double digit growth and optimization, but just wanted to call out the two areas we expect moderation, which is the T and E industry moderating because we saw such strong growth in the Q3 and context control growth.

Speaker 5

All right. Thanks for the color.

Operator

Thank you. One moment please. One moment for our next question. Our next question comes from the line of Justin Patterson of KeyBanc. Your line is open.

Speaker 12

Great, very much. 2 if I can. First, I just wanted to go back to kind of the demand environment for brand safety products. I realize that you can't completely correlate it with geopolitical risk. But if I step back, it does seem like there's a lot more Certainly on user generated content.

Speaker 12

You certainly have a lot more channel exposure there across short form video these days. So curious just how you're thinking about the demand for products like context control and the rest as we Head through Q4 and into 2024, which will also likely have a pretty heated political cycle. And then also stepping back, you now have several large marketplace clients in there like Uber and Instacart. I'm curious just what your initial learnings are, at least more so on the Uber side in there and how you think that can be become more of a contributor over the next few years? Thank

Speaker 2

you. Okay, Justin. I'm happy to take both. So the first is around the increasing demand that we're seeing from advertisers for our brand safety and suitability Solutions and a big reason why we're seeing this uptick in demand and we're seeing the increase in our measurement revenue in 3rd quarter It's because brands want to be where the users are and the users are spending more and more time of their time in social platforms. Even when you think about The 2 major platforms and their earnings from last week Meta, Meta Reels, Meta on their earnings call cited that Reels has driven more than 40% increase in time spent on Instagram since launch and Google's their YouTube Shorts now average over 70,000,000,000 daily views and are watched by over 2,000,000,000 signed in users every month.

Speaker 2

And exactly to your point, Justin, That these social platforms, it's user generated content, highly dynamic, highly unpredictable. So brands, they want to connect with consumers while they're on the social platforms. They just want to rest assured That their brands run adjacent to brand safe and brand suitable content and our AI backed TMQ product, The brands, they're leaning in and that's why we're seeing such strong both impression growth And adoption of the product, which is great to see. And then in terms of your second question was related to Retail Media Networks, is that right?

Speaker 12

Yes, that's right.

Speaker 2

And the Ubers of the world. Yes, so with retail media, that's another marketplace that's Just growing and accelerated growth. And when we take a look at Retail Media Network, we're also seeing significant growth In that channel, year to date, our revenue from retail media networks, it's grown nearly 150% And we were thrilled. I know last quarter we announced our partnership with Uber. This quarter, we launched a partnership with Instacart We're bringing a new level of transparency to Instacart ads and offering viewability And invalid traffic.

Speaker 2

And then the other partner I should call out is Criteo. We announced in Q3 our first to market partnership With Criteo's Commerce Media platform, where we are, on Criteo, enabling brands and agencies So we'll continue to invest in the retail media space. We're thrilled with the partnerships that we've launched and also the partnerships We're strengthening and again it's been a tailwind for our business.

Speaker 4

Okay. Thank you.

Operator

Thank you. One moment please. Our next question comes from the line of Jason Kreyer Of Craig Hallum, your line is open.

Speaker 13

Thank you. This is Cal Bardezol on for Jason. First one from me, Sounds like you guys are having a lot of success in your go to market strategy. I know that was a big point of emphasis at the Investor Day. So Just curious anything you would highlight there, maybe any efficiencies you've seen as AI becomes a broader part of your strategy and And go to market priorities as we go towards 2024?

Speaker 2

Yes, great question. Thanks, Cale. So with the go to market strategy in AI, I mean AI and ML is the core of everything that we do at IES. It fuels Our differentiated technology, one new example I can share is related To our TMQ product and especially with this accelerated adoption that we're seeing across the social platforms with TMQ, This is hot off the press scale, but we currently classify 40 years of video content across all the media Platforms, social media platforms every day. At IS, we evaluate every pixel and every second for true in And classification in more than 90 languages across all the major social platforms.

Speaker 2

And again, this is because of our Highly sophisticated TMQ product backed by MLAI, and we're very proud of the product's capability. It's getting smarter over time and the rapid adoption rates that we're seeing and we're really looking forward in particular To launching our beta with Meta later in the Q4 with TMQ.

Speaker 13

Awesome. Thank you. Just last one from me real quick. Just want to circle back to some of the stuff with the TV OEMs. You're pleased to see the Samsung expansion.

Speaker 13

Now you guys are integrating with VIZIO. So maybe as you guys kind of build out these OEM relationships, I mean, how much do you see this Publica differentiator growing and being able to be applied to generate wins across other segments of the business? Thank you.

Speaker 2

Yes, great question. So when we take a look at CTV, there's a lot of runway. With CTV, I'd say it is a $25,000,000,000 market in 2023. We've consistently said that CTV is a long game and We are building a robust pipeline with the OEM providers. This quarter, we announced our partnership With VIZIO as well as last quarter announcing that we renewed our exclusive partnership with Samsung And these larger OEM deals, they typically do have a larger a longer sales cycle, But our team, they're heads down focused on closing these deals, integrating the deals and continuing to launch innovative products.

Speaker 2

So The way to think about it is big $25,000,000,000 marketplace, but long runway, longer sales cycle, especially with the OEMs, But lots of upside.

Speaker 13

Awesome. Thank you, guys.

Speaker 2

Yes. Thank you.

Operator

Thank you. One moment, please. Our next question comes from the line of Matt Farrell of Piper Stanley. Your line is open.

Speaker 14

Congrats on the strong results and thanks for taking my questions. For the first one, I know you're not going to provide any Quantitative commentary on 2024 today, but any way you could help us think about the qualitative, the major puts and takes For next year, as you're kind of going through your operational planning right now?

Speaker 3

Sure. We're we continue to expect and plan for double digit growth in 2024. It's still early days and we're deep in our budgeting and planning process. We'll provide our 2024 outlook when we report on our 4th quarter results.

Speaker 14

Thanks. And maybe just to follow-up, You all are on pace to drive some really solid EBITDA margin expansion here in 2023 even as you've made some investments in AI. How should we be thinking about the cadence of margin expansion moving forward? And what are the primary drivers, kind of as we think over the next couple of years? Thanks.

Speaker 3

I would have similar comments in terms of our EBITDA margin as we look out in 2024. Our focus remains on Balancing growth and profitability. In 2023, we demonstrated our ability to expand EBITDA margins By driving efficiencies and productivities and we're deep in our planning for next year and we'll provide a further update in the 4th quarter.

Speaker 14

Awesome. Thank you so much.

Speaker 2

Thanks for having me.

Operator

Thank you. One moment please. Our next question comes from the line of Mark Rupaulkiewicz The Bench Company, The Benchmark Company, your line is open.

Speaker 6

Thank you. I was just

Speaker 4

hoping to get

Speaker 6

maybe Some cadence on measurement next year, and I know you're not wanting to quantify anything, but just at a very high level, If you think about all the deals that you've signed, both last quarter and this quarter, is there any reason to expect any of those deals Contribute to the first half of the year or is that all sort of more back end weighted or into Yes, further quarter is out.

Speaker 2

Sure. I'm happy to take that, Mark. So The way we think about and size the social platform opportunities, large building blocks, medium building blocks. So large building blocks include Meta, YouTube, TikTok, to a lesser extent, X Medium building blocks are tuck in Meta Reels and YouTube Shorts. And when you take a look at Where we are in the product, lifestyle and product adoption, YouTube TMQ launched in June, up and running, product adoption in place in over 30 languages.

Speaker 2

TikTok, as I mentioned before, humming 50 markets over 90 languages. Meta, We are pacing towards the Q4 beta with Meta and then Meta Reels and YouTube seeing nice Adoption of our viewability invalid traffic and Meta Reels will also be part of that Q4. So Several of these social platforms are already generating significant revenue for IES And it's early days. So we're just going to continue to focus on investing in the innovation, Driving the product adoption, land and expand into new markets and have a strong start to 2024 with our social platform offerings.

Speaker 6

Thanks, Lisa. That's helpful. And I just had one last quick one for Tanya. You had commented that mid tier was I'm trying to remember what you exactly said, I think meaningful Contributor to optimization in the 3rd quarter, I was just wondering if you could further quantify that and sort of what The pace of that penetration might look like over the next 12 months?

Speaker 3

Sure. Yes, we are really pleased to see the growth, particularly in optimization from the investments we've made in mid tier clients. In fact, The growth rate for our mid tier revenue in optimization in the 3rd quarter doubled from the 2nd quarter. So The big contributor to our over performance in the 3rd quarter.

Speaker 6

Okay. In terms of revenue contribution, is there any color you can provide there? Yes.

Speaker 3

I mean, we've been making investments in mid tier around product integration, hiring programmatic specialists. So we do expect Those investments to continue to pay off and we were pleased to see the ramp so quickly in the Q3.

Speaker 6

Okay, fair enough. Thank you.

Operator

Thank you. One moment please. One moment for our next question. Our next question comes from the line of Tim Nollen of Macquarie. Your line is open.

Speaker 15

Hi, thanks for taking the question. I know we've had a number of questions on the social media roll ons. And I got a 2 part related question to that as well. I noticed that your CPMs, you say were flat in the 9 months and the 3 months. I wonder if the social media CPMs, if you could talk about What the pricing might be like on those if we might get better CPMs out of those over time?

Speaker 15

And then relatedly, It sounds like these social media roll ins are all well underway or at least there's a lot even more to come next year. I would assume the costs Are largely done or let us know maybe if there are any incremental costs you'll have to incur there? And if not, can this be a nice driver of Profitability upside from here in the more sustainable operating income higher levels? Thanks.

Speaker 3

Yes, correct. In the both the year to date period and the Q3, we were really pleased 17%. And we were able to do that while also having at our average CPMs for the quarter consistent with the prior year period. So pleased to see that. In social, in particular, it's a higher mix of video and video is a premium to our display ads.

Speaker 3

So that was a tailwind for CPMs. The other thing is, we're really pleased to see expansion internationally in markets like Europe and APAC In the quarter with strong growth there and our CPMs are slightly lower in those markets, so that was an offset to the favorable mix on CPMs.

Speaker 4

And then,

Speaker 2

do you agree

Speaker 15

No, that's good color. Can you speak about the profitability upside potential,

Speaker 2

Yes. So the beauty of our TMQ technology That's running in the live feeds of the social platforms now is that the product is backed by AIML. It gets smarter over time and we don't see significant increase in costs As the product scales over time, the technology gets smarter, it gets more efficient, and it operates at scale.

Speaker 15

Right. So I know you're not talking 'twenty four guidance by any means, but the implication might be if CPMs can rise on social and more social rolls on and there's no incremental cost, we could be getting Optimistic about better profitability going forward?

Speaker 3

So I would temper that. We have executed on a Consistent track record and driven profitable growth consistently throughout 2023 quarter by quarter with our margin improvement. We have a large TAM ahead of us. We've taken a balanced approach to driving revenue growth and profitability, And we'll continue to maintain that balance because I think it's important as we're driving these efficiencies and productivity that we're also investing in the growth of the business. Right.

Speaker 15

All makes sense. Thanks for the color.

Speaker 2

Thank you.

Operator

Thank you. I'm showing no further questions at this time. I'd like to turn the call back over to Lisa Uchneider, CEO, for any closing remarks.

Speaker 2

Thanks everyone for joining today's call. We are coming off a strong Q3 with double digit growth in measurement and optimization, And we are excited to execute on our strategy in the Q4. We will continue to innovate with the

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Earnings Conference Call
Integral Ad Science Q3 2023
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